Gilts are IOUs issued by the Treasury, paying a fixed rate of interest each year. They are considered one of the safest ways of investing for income because the Government is unlikely to default on the money you have lent it. Rates of return, however, are coming down.

Recently the redemption of Treasury 7pc 2002 returned £9 billion to its holders, and Treasury 8pc 2002 will be redeemed in October. In total, the Treasury is returning £17.6 billion to investors this year.

Gilts issued this year, however, have a yield of only five per cent. As they can often only be bought into above par - at a higher price than that they were issued at - the real returns are lower still.

As more institutional investors, such as company pension schemes, have turned away from the stock market and towards fixed-interest investments in the past few years, the price of gilts has risen. As a result, real returns from gilts have fallen significantly. One reason the demand for gilts yielding eight or nine per cent has risen is that interest rates have fallen so much. The Bank of England Base Rate is now only four per cent. Gilts can be traded once they have been issued so, depending on the demand for them, the actual yield can vary. For instance, Treasury 8.75pc 2017, which was issued in 1992, has a gross redemption yield of only 4.9 per cent now, because the price is higher than when it was issued.

Paul Ilott, from the independent financial adviser, Bates Investment Services, said: "Gilts are normally issued at a "par value" of £100, which is also the price at which the UK Government promises to buy them back when they reach their redemption date. But, during the lifetime of the gilt, the price per £100-worth of nominal stock fluctuates mainly in response to interest rates available elsewhere."

Jim Leaviss, head of fixed income at M&G, the fund manager, said: "The current lower gilt yields mean that investors who simply roll over into a new or existing gilt face the prospect of either a lower level of income - perhaps as much as half what they were used to - or erosion of capital over time if they buy another high coupon issue."

A popular alternative to gilts are corporate bonds. These are IOUs issued by companies and the yield from them varies depending on the likelihood that the company concerned will default on the debt. "Because companies can go out of business, the risk of default is higher than for gilts. Therefore the corporate bonds have to offer higher interest rates to investors by way of compensation," said Mr Ilott.

Mr Ilott said one way to spread the additional risk is to invest in a pooled fund, which in turn can put money into a wider range of corporate bonds.

Funds that invest in safer companies - those least likely to default - produce lower income than those which choose riskier companies. High-yielding bond funds can offer income yields of about 9pc a year if you are willing to take the additional risk.

Philip Pearson, from the independent financial adviser, P&P Invest, recommended the M&G Corporate Bond and the Fidelity Moneybuilder Income funds. There is no initial charge to invest in either fund and the annual management charge is one per cent for M&G, and 0.7 per cent for Fidelity.

For riskier, high-yield corporate bond funds, Mr Pearson recommended Invesco Perpetual Monthly Income Plus, yielding 11.2 per cent. He added that the risk to capital is high in this fund. "Also worthy of consideration is the Legal & General High Income fund, which is a good compromise between risk and income, with a yield of 7.4 per cent and a low annual management charge of only one per cent."

If you want to achieve some capital growth as well as income, you could consider an equity income fund instead. Although these funds provide a lower yield initially, there is the potential for rising income if the capital grows. Mr Ilott recommended Credit Suisse Monthly Income fund, which is providing a net dividend yield of 3.87 per cent. "Basic rate taxpayers would now need a gross return from a deposit account of 4.84 per cent in order to get the same level of income and then there would be no potential for capital growth." This fund has a 5.25 per cent initial charge and a 1.2 per cent annual management charge.

Although annuities, which provide an income for life, have become unpopular because of the requirement to buy them with the proceeds of a personal pension, they can provide value for the right investor. They can be bought from insurance companies, but once you have handed your capital over, you cannot have it back again.

Vivienne Starkey, from the independent financial adviser, Equal Partners, said: "Although annuity rates are not high at the moment, and you have to give up your capital, they can be a tax-efficient way of investing for income. Part of the income you receive is deemed as a return of capital, so you do not have to pay income tax on it.

"This varies according to your age, but the older you are, the greater portion of your income that can be deemed not subject to income tax. In many cases elderly people are having to live on their capital anyway."